Adam Smith, "Chicago Adams" and Clark

As mentioned earlier, Clark dismisses Smithian and neoclassical economists’ insistence on “getting the institutions right” for economic growth. His empirical evidence shows that the incentive fostering institutions were not absent in the preindustrial England as argued by Smith and his proponents. He lumps all the economists, Smith and his followers all the way to the proponents of the Washington Consensus, in one bundle and argues that their assessment of the factors necessary for economic growth is misguided.

Table 1: The incentives of Medieval versus Modern England; Source: Clark 2007, p.148

From this table, provided that it is true, it is clear that most of the classical and neoclassical assertion on getting institutions right was in fact fulfilled way back in 1300. The basic idea is that bad institutions give rise to disincentives and thus would dampen innovation crucial for growth. Clark shows that even when there were good institutions conducive for growth, in neoclassical perspective, there was a stagnant economy before 1800.

Clark argues that the Washington Consensus, crafted by neoclassical economists in 1990, which focused on “getting institutions right” for economic growth, is a continuation of Smith’s ideas. Under this school of thought there are homogenous material preferences and aspirations, and people behave differently because of differences in incentives. This means that right incentives like low tax, secure property rights, and free market of the factors of production are basic requirements for growth. However, Clark argues that the preindustrial societies had more or less all the prerequisites for economic growth but no technological advance sufficient enough to increase income above the subsistence level. He uses this analysis to argue that Smith was wrong.A very non-fitting argument in the present context (in fact, this is an autarkic argument) Clark makes is that the sub-Saharan African countries such as Malawi and Tanzania would have been better off in material terms had they never had contact with the industrialized world and instead continued in their preindustrial state. This is in direct contrast to Smith’s and Ricardo’s views on trade; especially the latter’s views on comparative advantage.

He also criticizes Smith on his call for restraint on government taxation and expenditures because the state’s action did not influence material living standard during the Malthusian era. Contrary to Smith’s arguments in The Wealth of Nations, he argues that in the long run population growth would restore the equilibrium even though good government could make countries rich in the short run.

Clark views confirm with Hayek’s views that economic success depends on the proliferation of knowledge when he states that the rapid growth in Europe was generated by investments in expanding the stock of knowledge in societies. Clark argues that physical accumulation of capital account for one-third of growth and efficiency advancement (also knowledge advancement) account for two-thirds of growth. If growth is dependent on culture and genes, then knowledge must also somehow depend on these factors because growth is driven by the expansion of knowledge. This puts Clark in odds with the spontaneity of knowledge argument by Hayek even though he seems to agree that knowledge expansion holds a key to growth.

Clark also argues that profit-motive was a weak stimulus to innovation in the preindustrial societies. As discussed earlier, innovators were innovating despite market reward being too small as compared to today’s rewards. This is in contrast with the views that economic agents are driven by profit in the market economy. Moreover, he also argues that the neoclassical idea of homogenous preference was not true because as society was subject to natural selection, preferences changed over time, i.e. preferences are evolutionary. He also argues that Ricardo’s assessment that as population increases land rents also increases and return on capital decreases was wrong. The good bourgeois virtues, transmitted through genes and culture, spurred the expansion of knowledge and hence increase in efficiency rates, leading to increase in innovation. This increase in efficiency rates essentially meant that land rent was independent of population growth and an increase in return on capital increased is caused by knowledge expansion.

Clark also dismisses the view that inadequate capital stock leads to underdevelopment. Given the free flow of capital, and relatively freer flow in the preindustrial world, access to capital stock did not affect development. Underdevelopment is a result of inefficiency in production, not access to capital. Clark cites an empirical research from the textile industry, in which technology was fairly similar and accessible throughout the world. However, the England had greater productivity, which shows that workers in India and Africa were relatively inefficient. From this he deduces that underdevelopment is chiefly a cause of inefficient workers or poor labor quality. Clark does not say anything about the initial endowment of resources to purchase technology. Even if technology was freely accessible in those days, poor countries could not have purchased them because of a lack of finance. This is evident from the fact that small countries like Nepal and Bhutan were unable to introduce technologies earlier in their economy because of a lack of financial resources, not accessibility. Thus, Clark’s conclusion is sketchy because he assumes enough endowment to be given in the background. Moreover, given the preference of profit-motivated firms to establish factories in the developing countries, workers in South African automobile firms must be at least not less efficient than workers in the industrialized countries. Had this not been the case then the profit-motivated firms would not have gone in the developing countries. But, still the developing countries are not growing and experiencing changes in living standards in real sense. This means that quality labor alone does not justify growth and increasing living standard.

Clark seems to have lumped all the neoclassical economists in one group led by Smith. However, it is quite clear that there is a difference between the Adam Smith from Scotland and the Adams from Chicago. The latter’s are proponents of the Washington Consensus, whose recommendation on ‘getting the institutions right’, was wholeheartedly followed by the IMF. Clark thinks that the institutions that have wholeheartedly accepted North’s arguments in getting institutions right for economic growth. Clark boldly argues that “if we are going to solve the problem of poverty in sub-Saharan Africa, the solution is going to come in a very different form then the followers of Adam Smith are going to accept” (Ellman and Salvin 2007). Meanwhile, Bryan Caplan argues Clark’s assessment of growth and poverty from Smith’s eye is mistaken. He backfires by arguing that “had voters and politicians around the world since 1800 had just done what Adam Smith told them to do in The Wealth of Nations, poverty would already be a thing of the past. (Caplan 2007). Moreover, Clark misses to recognize that at least the World Bank’s approach, in today’s context, does not entirely confirm to North’s and Washington Consensus’ recommendations (Solow 2007).

Similarly, Bowles (2007) opines that Clark’s criticism of the World Bank and IMF reflect his view that getting institutions right for poverty reduction and development is less important than “people getting their values right.” Moreover, he also argues that Clark’s view of medieval England as a free market economy is not consistent with the feudal economy that was present in the preindustrial era. He argues that in the feudal and mercantile economy, the market for the factors of production was not as free as Clark has argued. In fact, the immigration of Indian workers to Africa was not due to free mobility of labor across borders. It was a forced exploitation of cheap labor by the East India Company, the British Empire’s entity that was responsible for trading from the Indian subcontinent. On this particular context, The Economist argues that Clark’s hypothesis would be rejected in the developing world, especially regarding the Indian textile industry because “the British went out of their way to hobble the Indian textile industry” (The merits of genteel poverty 2007).

Moreover, India did not de-industrialize itself. They producers in Bengal were forced to forgo cotton production by imposing harsh condition on workers and producers (Chomsky 1993). Subsequently, the cost of production was pretty high and a net exporter of cotton was a net importer; there was a huge net transfer of assets from India to Britain before 1815 (Clingingsmith and Williamson 2004).

Not all economic historians agree with Clark on the low interest rates of the preindustrial England. Philip Hoffman, a historian at the California Institute of Technology, argues that the decline in interest rates could have been the result of state’s delivery of better domestic security and guaranteed property rights (Wade 2007).